How do you know when it's time to sell a big winner? Is the latest dip a sign that it's finally going to collapse? Or is the pullback just a blip on the way to bigger gains
The best stocks tend to pull back numerous times throughout their long run, making higher highs and higher lows.
Nevertheless, watch each pullback carefully. One of them will be the sell-off that kills the rally.
A high-volume break below a trend line connecting a series of higher lows usually tells you it's time to sell. The line starts at the low of the first pullback to or near the 10-week line after a and extends through the lows of two subsequent pullbacks.
Draw the line on a weekly chart over a span of at least 18 weeks. A line drawn on a daily chart, or one drawn over a shorter period, may compel you to sell too early.
The trend line method might not trigger a sell right at the top, but it's been repeatedly shown to work for growth stocks. Investors should also consider overall market health, stock fundamentals and other chart signals in deciding whether it's time to sell.
Intuitive Surgical (ISRG), the maker of da Vinci robotic surgical systems, broke out above a 19.20 from a cup-with-handle base in July 2004. The company turned years of net losses with a strong profit that year.
The first major pullback came during the week ended Oct. 29, when the stock sliced through the 10-week line to a low of 21.12. Yet the stock didn't undercut its buy point, and it soon rebounded to a new high in strong .
Intuitive retreated for a second time in April 2005, piercing the 10-week line, plunging 14% in big volume and hitting a low of 40.15. Only an investor who had a solid profit cushion would have been able to sit through such a decline.
The stock didn't fall further below the 10-week line. It eventually formed the second point of the trend line with a low near 46 and broke out again.
The third retreat came in October, when Intuitive again sliced through its 10-week line to a low of 63.77. This was a milder drop.
A trend line connecting the three lows showed that the stock should have been sold in February 2006. (1)
Were there additional sell signals? Yes. A month earlier, it made near 135 in weak trade. In early February, it crashed through its 10-week moving average in massive trade. (2) Intuitive fell 38% by January 2007. It took nearly a year and a half before it broke out again to hit new highs.